Jonathan Miller Appraises the Commercial Market

In 2005, Jonathan Miller made a prediction on CNBC that, due to what he saw as a growing endemic within the mortgage industry, a downturn was on the way. Three years later, after the economy nose-dived, the cable news network reran the clip–this time in a segment looking back on the experts who got it right. Since then, Mr. Miller, 49, has shifted his business from the large banks that traditionally throw cash at the appraisal industry to the buyers, sellers and litigators who he believes demand more accurate estimates.

The Commercial Observer: Have your companies faced challenges since the downturn?

Mr. Miller: It doesn’t seem to be the case, actually. In fact, speaking for Miller Samuel, it’s always been contrarian. We tend to thrive during weaker housing markets because people are seeking out more advice or consulting expertise and they really want the real story because they have to deal with knowing how to dispose of an asset and that sort of thing. We’re on track this year to be our best year in 25 years. Last year was our best year ever. This year is outpacing last year.

Miller Cicero is doing very well, too. We’re on pace to be about the same as last year, which was, again, our best year ever. We’re not quite at as high a trajectory as Miller Samuel, but we’re on par to equal our best year, which was last year.

What do you attribute that success to?

I think a big part of it is because we reduced our reliance on banks because about five years ago I started blogging about the issues we’re reading about now. I was very frustrated because we were under tremendous pressure to ‘hit the number,’ and we weren’t morally flexible enough to do that. And so that hurt us during the boom period, but now business has come back in spades because now people realize that we’re really straight down the middle.

Is it easier to avoid that ‘hit the number’ mentality now, during the downturn?

Well, it’s easier than it was if you’re an appraiser that’s working only for residential banks, but it’s certainly still alive and well. The banking clients that we deal with now, we’ve gotten away from the retail banks. The appraisal quality today for banks is far worse than it was even during the boom times, when it was poor to begin with.

Why is that?

There is something called the Home Valuation Code of Conduct that was an agreement between Fannie Mae and New York Attorney General Andrew Cuomo. And so, in other words, when the smoke settled, the only thing left is that there is now no reliance on local expertise. So you have appraisers coming from Albany, because they’re New York State-certified, to appraise in Manhattan, even though they may have never been here before, and they got the work only because they were the low bidder. So it’s become very bizarre. We’re at a critical juncture.

What percentage of your business is with banks as opposed to private entities?

To give you a quick breakout, 75 percent of our business is non-bank. In 2005, when I had this epiphany that if I didn’t change my orientation away from banks I’d be out of business-and I was right—back then, it was 75 percent banks. Now it’s 75 percent non-bank. That epiphany came from the day-to-day pressure we were under and the clients we were losing because we didn’t ‘hit the number.’

Historically, do residential and commercial market prices parallel each other?

No. In fact, I don’t look at the prices in terms of relating the two. I look at the volume, the units-the transaction activity. When you step back and look at the last couple of years, both markets are characterized by a sharp fall in transaction activity, which is why we were having all the problems we were having.

What gets lost in looking at real estate markets in terms of peaking or bottoming is there’s so much emphasis on price. Really, the emphasis should be on transaction activity, because transactions lead prices because that influences inventory levels and the ultimate price paid. You could see that during the run-up, where housing and commercial prices peaked a couple of years ago. But you could see weakness and a fall-off in activity before that.

Home prices began to go up in 2004 and 2005, even before the office market really roared. Will that sequence happen again?

In many ways, I feel like that was emblematic of what was wrong with the housing market back then. During the boom, which was not a housing boom—it was a credit boom with a housing boom symptom—housing was in front of the economy. So, in many ways, housing was in front of commercial, not because commercial was organically driving demand for housing because companies were hiring and expanding, but because of credit.

Credit was virtually free, whether you were a developer or a buyer of mortgages. So the credit condition put housing in front of the economy, and I think that’s backward because today you actually have to have a job to get a mortgage. In 2004, you didn’t—that’s what’s changed. So I would look to see more improvement along the commercial side before you see it in residential.

What trends are you seeing in the commercial real estate market?

I think what you’re seeing, besides a whole lot of extend and pretend, is investors looking to acquire assets far less expensive than a few years ago and then turning the property around. What we’re seeing now is another bubble-rising rapidly.

A bubble?

I would call it a bubble. And I’m not talking about individual unit purchases. I’m talking about prices being paid on distressed real estate snatched up from a developer in trouble. It’s interesting because, after Lehman, which I see as the tipping point, there was little activity. The hedge funds and the groups that were forming distressed-asset strategies went out in 2009 to raise capital to prepare for the onslaught of acquiring all the distressed property that was going to become available. And, over 2009 and the early part of 2010, there was very little activity. It was very quiet. And I think at some point a few months ago, with all the positive news we saw in the U.S. housing market, you started to see everybody coming out at the same time, competing for the small amount of property out there.

As a result, it appears that a lot of this property is being snatched up above what the repurposing of the property will yield. In other words, you may win the property, but the consumer’s situation hasn’t changed. Unemployment is still high, and hasn’t changed appreciably in the last year. The only thing that’s changed is we’ve had a tax credit, which stoked demand by poaching from the future. The math doesn’t seem to work, so I’m mystified by how so many smart people seem to be caught up in a herd mentality all over again, as if we didn’t learn from what we just went through.